* Mining's altered landscape is theme of PDAC convention
* Industry's euphoria, driven by soaring prices, has
* New reality is austerity, creative financing, cost
* Strategies for adjusting depend on miner's development
By Julie Gordon
TORONTO, March 1 The euphoria that dominated the
global mining industry in recent years, when rapid Chinese
growth sent metal prices soaring, is fully spent. With metal
prices now stagnant and profit margins slim, budget cuts and
multibillion dollar writedowns have become the norm.
In reaction, shareholders have demanded blood over the past
year - sometimes in the form of a chief executive's head -
leaving new management to usher in policies of cost controls and
disciplined spending. Traditional equity financing deals have
all but evaporated, leaving many small miners high and dry.
"With the fly-up in commodity prices, there was far more of
a focus on 'let's just get the production out,'" said Rachael
Bartels, managing director of Accenture's global mining group.
"Now there is an increased focus on 'are we doing things the
Getting it right in the altered landscape is a theme that
will run through this year's Prospectors and Developers
Association of Canada convention, opening next week in Toronto.
With more than 30,000 attending, PDAC ranks as the world's
largest mining convention. Traditionally it is the prime venue
for exploration companies to tout their projects to outside
investors and to established miners.
While most juniors hope one day to either be swallowed up by
a larger player or evolve into a powerhouse, expectations are
tempered this year, with many of the big players eschewing M&A
in favor of austerity after a series of soured takeovers.
Indeed, with economic uncertainty still weighing on
commodity prices and oversupply forecast for some base metals
and steelmaking materials, the mood is a far cry from the go-go
days prior to 2012.
THREE BASIC STRATEGIES
As miners and explorers struggle to right their ships, the
strategies embraced by companies are generally dictated by their
stage of development.
For the small fry, slumping share prices and volatile
markets have made it nearly impossible to raise funds through
traditional capital markets.
"If you start with a junior, right now - in 2012 and 2013 -
cash is king," said Bruce Sprague, national mining leader with
accounting firm Ernst & Young.
Those with cash are stretching it out to survive through the
lean times, while those that need to raise funds for development
work are turning to small private placements or stream and
royalty deals - in which a company agrees to sign over future
production in exchange for up-front cash.
Sprague also sees so-called "mergers of equals" becoming
popular, as two similar-sized juniors look to partner up to
create a larger combined entity.
That was the plan for Keegan Resources Inc and PMI Gold Corp
when the two Ghana-focused exploration companies
announced a tie-up in December. But it did not go as planned.
The two backed away from the deal in February when it became
apparent that PMI's shareholders would reject a takeover. Keegan
has since changed its name to Asanko Gold Inc.
DIAMOND IN THE ROUGH
For the mid-tiers, caught in the middle of their growth
phase, strategic focus is increasingly important. Many are
looking to turn assets that do not quite fit their portfolio
into cash, and then using that cash to fund other developments.
"Divestiture is a theme," said Sprague. "Maybe we can divest
of one property, that gives us cash and fills our coffers, so we
can look at building one of these other assets."
Selling one asset to fund another has worked well for Harry
Winston Diamond Corp, which aims to transform itself
into a leading Canadian diamond producer.
The company, which owns 40 percent of Rio Tinto Plc's
Diavik diamond mine, offered in November to buy BHP
Billiton Plc's majority stake in the Ekati mine in
northern Canada. Two months later, it reached a deal to sell its
luxury arm to Switzerland's Swatch, making a clean
break from jewelry retailing.
The shuffle not only made clear Harry Winston's strategic
direction - the company is also renaming itself as Dominion
Diamond Corp - but also left the miner with extra cash in its
pocket for future dealmaking.
While the ducks all lined up for Harry Winston, other
mid-tiers looking to offload assets may not be so lucky.
"I think it's going to be a challenging environment for
them," said Darren Lekkerkerker, a fund manager at Pyramis
Global Advisors, a Fidelity Investments company. "There's not a
lot of buyers and, unsurprising, it's usually not their best
assets that they want to sell."
Still, there are other ways to unlock value, even in a
volatile market. HudBay Minerals Inc, which is building
the Constancia copper mine in Peru, struck a $750 million stream
financing deal with Silver Wheaton Corp last summer,
effectively monetizing some of its precious metal by-products.
MANAGING THE CYCLE
At the other end of the spectrum are top miners like Rio
Tinto, BHP Billiton and Anglo American, which have all
replaced their CEOs in recent months. Many of the top
diversified and precious metal miners are facing declining cash
flows as costs rise and commodity prices weaken.
"If your iron ore businesses are making billions and the
investors are getting lots of cash, it's very easy to sort of
downplay poorer performance," said Bartels. "The softening
prices have basically exposed poor performance."
After being burned by costly deals made during the boom,
management teams are now pledging to rein in costs and maximize
returns, shunning the old mandate of growth at any cost.
"It's very easy to invest, invest, invest when there's a
boom in the prices," said Bartels. "One of the things the mining
companies really need to work on is being able to manage across
GIVING BACK TO SHAREHOLDERS
To that end, Newmont Mining Corp, a big Denver-based
gold miner, is rolling out a new productivity plan and has
promised to prioritize its dividend, which is pegged to the
price of gold. It boosted its dividend by 21 percent to 42.5
cents per share in the first quarter of 2013.
"As an industry, our total return performance has been poor,
especially against the backdrop of more than a decade of
year-on-year gold price increases," said Gary Goldberg,
Newmont's new chief executive, in a mid-February conference call
when he was transitioning from his previous role as chief
By focusing on returning cash directly to shareholders
through regular dividends, mining companies can rebuild value
and that will ultimately boost share prices, analysts say.
But while dividends are the new trend in the post-boom era,
there is still room for mining companies to do what they do best
- which is finding, developing and building good mines.
"If they have a great project, I'm happy that they execute
that project and create value that way," said Lekkerkerker, who
co-manages the Fidelity Global Natural Resources Fund. "If not,
and they can't create value through building a project, I would
prefer dividends back."